Yahoo's board suddenly has a big, looming problem and it could mean the end of Marissa Mayer

The next big fight could soon be coming to Yahoo's boardroom.

And this time it could mean the end of the line for Marissa Mayer's tenure as Yahoo's CEO.

Over the last few weeks, the news surrounding Yahoo has been bad.

On Wednesday, SunTrust analyst Bob Peck wrote about a doomsday scenario for the company's tax-free Alibaba spin-off in which Yahoo actually losesmoney.

On Thursday, activist hedge fund Starboard Value wrote a letter to Yahoo's board arguing that it shouldn't pursue its planned spin-off of a 15% stake in Alibaba but should instead spin out the company's core business.

Starboard's argument, in short, is that Yahoo's planned spin-off is simply too risky and no longer has shareholder support. As a result, Starboard believes Yahoo must change its strategic direction.

In a conversation Friday morning, Peck told Business Insider that indications from Starboard's letter are pretty clear: Starboard will seek some sort of board representation, or perhaps nominate an entirely new slate of directors, if the board remains unresponsive to their suggestions.

As it currently stands, no indications from Yahoo have suggested the company is rethinking its Alibaba spin-off plan.

One Yahoo investor told us that the board and Yahoo's management team appear not to be thinking about this as owners of the company — and therefore stewards of shareholder capital — but as a management team that simply wants to keep itself in place.

In other words, this investor sees Yahoo's board in something resembling self-preservation mode rather than acting in the best interests of the company over the long term. 

The Alibaba bull case

Back in 2011, hedge funder Dan Loeb began accumulating a stake in Yahoo and argued that the company's primary goal should be to unlock the value of the Alibaba stake.

And as chronicled in Nicholas Carlson's book, "Marissa Mayer and the Fight to Save Yahoo," Loeb basically got the market to see things his way, installed then-Google executive Marissa Mayer in the top spot, then sold his stake in the company for a big gain. 

Since then, the bull case on Yahoo has been all about a belief that Yahoo would be able to effectively unlock the value of that Alibaba stake at a big gain to shareholders. Additionally, this sort of "free money" embedded in Yahoo stock would allow a new management team to make changes to turn the company around under the cover an stock price appreciating due to external factors.

But this now seems to be in doubt. 

Bob Peck at SunTrust wrote what was effectively a letter to the board on November 13 asking if now might be the right time for major change at the company. Said another way, Peck wondered if now is the time for CEO Marissa Mayer, who has held the top spot at Yahoo since July 2012, to go. 

On Thursday, Forbes' Miguel Helft published an investigation into the current state of the company that asked, among other things, if Mayer may be in her last days at the company.

"Things have become so dire that some insiders are speculating that Mayer will throw in the towel and look for a graceful exit—perhaps using the birth of her twins, expected around the New Year, as a reason to step down," Helft wrote, adding, "Others say that's nonsense and that Mayer will continue to fight, as long as the board keeps her on the job."

But aside from questions about the continued viability of Mayer's tenure, also hanging over the company is its planned tax free spin-off of a 15% stake in Alibaba, the Chinese ecommerce giant that went public in the US last year to much fanfare. 

Back in May, Yahoo shares got creamed after investors got jitteryfollowing commentary from an IRS official that suggested the "tax free" part of Yahoo's plans around its Alibaba holding might be under review. 

And Peck told Business Insider on Friday that Starboard's letter has now brought the risks surrounding Yahoo's plans for its Alibaba holdings into the public view and that now, at a minimum, the board will be forced to justify sticking to its plan.

Yahoo did not respond to a request for comment on this story.

Proxy fight? 

At the end of its letter, Starboard makes it clear that a proxy fight for board seats could be coming, writing that, "we expect the shareholders' interest to remain of paramount importance and will look to make significant changes to the Board if you continue to make decisions that destroy shareholder value."

Earlier this year, Yahoo avoided a proxy fight with Starboard, which in September 2014 argued that Yahoo and AOL should merge. (AOL was later acquired by Verizon.)

Eric Jackson, a prominent Yahoo shareholder, wrote for The Street in April that basically, it seemed Starboard couldn't win over shareholders who had seen the stock go from $15 to $44 under Mayer.

But with shares closing near $33 on Friday, that argument could now potentially be more winnable for Starboard. And with the Alibaba stake looking more risky, this argument is potentially worth fighting harder for.

The IRS problem

The issue surrounding the Alibaba spin-off right now is whether Yahoo's plan meets the IRS criteria that requires the entity being spun out — in this case, Yahoo's 15% stake in Alibaba and Yahoo's existing small-business unit — will qualify as something more than just a device to transfer gains in a tax-advantaged way. 

In tax speak, the spin-off needs to comply with "Section 355" of the IRS code.

No one Business Insider spoke to for this story believed that Yahoo's planned spin-off of Alibaba wouldn't be viewed favorably by the IRS, meaning the "tax-free" spin-off would be executed tax free with Yahoo shareholders effectively getting a tracking stock on a 15% stake in Alibaba.

But there are a few problems here.

For one thing, this is shaping up to be a drawn-out process that leaves investors twisting in the wind.

Initially, Yahoo implied the spin would happen in the fourth quarter of 2015. Now it looks like it's going to happen in 2016, which means it goes to the IRS in 2017 for a review, according to Peck. He says the IRS then has three years to decide if it's going to audit Yahoo or not. 

"Procedurally, the worst-case scenario will be if the IRS picks up the case for audit in October 2020, decides to impose taxes, and the company has to go through the protracted legal process before the issue is finally decided," wrote Peck.

"In this case, it is possible that [Yahoo] shareholders may not have clarity on the tax question for the better part of the next decade."

Asking shareholders to hang in there just to see a plan that may or may not work come through is not a way to inspire confidence.

And strategically, the problem from Yahoo's perspective is that it has already committed publicly to this spin out.

And as one investor told Business Insider, boards are loath to change their minds about strategic decisions once they've been made.

The core business

All of this tax-spin chatter, however, is mostly financial engineering.

Mayer was hired for her software engineering and product prowess. She was supposed to be a "products" rock star from Google who would breath fresh life into Yahoo's service.

In Silicon Valley, companies live and die by their "product," which is a way to describe the services companies offer consumers and businesses. (Instagram's photostream is a "product." Facebook's newsfeed is a "product." The iPhone is a "product.")

Yahoo today is essentially in no better shape than Yahoo when Mayer showed up. Mayer hasn't produced a single breakout hit product for Yahoo.

One of Mayer's big focuses, for example, has been mobile. And yet the highest-ranking Yahoo app in the iPhone's App Store is Yahoo Mail, which is ranked #75.

Facebook has three of the top four apps as of this writing. Google has two in the top ten. Even McDonald's and Walmart have apps ranked higher than Yahoo.

And, as Peck noted, Yahoo's revenue and cash flow are down significantly from when Mayer started.

SunTrust

Earlier this month, Re/code's Kara Swisher reported that Yahoo had hired consultancy McKinsey to help Yahoo decide which units of its company to close, which to sell, and which to invest in.

There's nothing wrong with hiring consultants for advice, but a lot of people are wondering what took Mayer so long.

A quadruple whammy

Mayer could have afforded a slow turnaround of the core business if she had managed to flawlessly deliver on the Alibaba spin-off. Alternatively, Mayer could have afforded to screw up the spin-off if she had nailed the core business.

What she can't afford is to have neither work out. And that's what looks increasingly likely. 

Compounding those errors is the fact that Mayer and her management team seem to have torched relations with investors. Starboard, in its letter, says Yahoo has been "reluctant to respond or adapt to the realities of the current environment."

If all of this wasn't bad enough, Mayer is losing executives at an unnerving rate.

Yahoo for years has been a company adrift. Mayer was supposed to be a change. She was supposed to finally save Yahoo.

Instead, it looks increasingly likely that Mayer is going to end up yet another victim of Yahoo's decade-long struggle to turn itself around.